Friday, March 25, 2011

If you’ve been reading for the past 6 months, it should be quite obvious by now that I’m not in favour of monetary easing. To me, belief in its efficacy is like belief in the morality of the gold standard. Together, they just put a collar around the entrepreneurial spirits of the real economy. The gold standard puts a ceiling to the level of real economy demand a free market can achieve on its own, while monetary easing puts a floor to any real adjustments the economy needs to make in order to rejuvenate itself again.

If you’ve been with me some time on this blog, you’d probably notice that my prescription leanings for restoring aggregate demand tend to be on the fiscal side, as long as it’s coupled with capital controls. I would be more open to monetary policy action, as long as its coupled with strong, dynamic macroprudential policies (My belief is that easing can be useful, for as long as there is no concurrent balance sheet recession going on to offset it).

Monetary easing in and by itself is pro-speculator, and anti-poor. And while monetary easing by a default currency issuer may not be hyper-inflationary to the issuer, it is for all others who use that currency. Unmitigated easing only hastens the day that other nations start to refuse it as the default. And if you really think about it, for as long as monetary easing leads to more speculation, which leads to higher prices for commodities, it only results in even less investment in the real economy. So it’s quite the facetious prescription to jumpstart an economy.

The problem with fiscal policy, on the other hand, is that it is so broad-based a prescription, and any one of fiscal policy recommendations can also end up counter-productive or inconsequential to the greater economy. As for me, I would consider myself open to a fiscal policy action that incentivises local companies to start getting more into labour-intensive businesses. This means subsidies for firms that avoid automation and/or outsourcing. And conversely, higher taxation on those who insist.

Obviously this means higher cost of goods locally, as well as the possibility of losing export market share, as local producers need to start using local employees when more cost-efficient ones can be found overseas, or by automation. So this is where the subsidy could come in. The government will buy the goods from the local producer at its cost of production, plus a reasonable return to the producer for his effort ( though nothing for the non-existent risk of finding no market), then the government simply turns around and sells the goods at the global clearing price.

I know what you’re thinking. Protectionism! And this could lead to more global infighting. Well, unfettered globalism has just led to infighting anyway, why not do something to restart local demand while doing it anyway? (sarcasm). Right now, we’ve already got a so-called currency war ongoing, and who knows where this will lead to next.

And if you’re thinking of the endless millions the government will squander buying local goods at cost and selling for a loss, well, it’s probably no different fiscal outcome from building bridges to nowhere, but hopefully local businessmen start getting the message that the government is serious about stoking local demand. Buy local, sell local, hire local. Who else to lead the way than a government currency issuer with no budgetary constraints (other than the fact that doing so can cause real inflation, which would at least be due to real demand being stimulated, rather than stimulating commodity speculation).

I know what you're thinking - this recommendation also undermines free market. But globalization and the hollowing out of local industries has also undermined the free market, in that it has stacked the odds in favour of the very big, whose example everyone has to follow, and the many-tentacled, which ends up controlling everything. Of course, there’s a lot to think about in operationalizing something like this, such as establishing a local quality board that ensures companies that sell to government produce using current global best practices.

I’m not saying that we reverse globalization, but we need to halt it in its tracks for the meantime, before it destroys more locally generated income. And what I’m thinking need not be permanent, but simply to jumpstart demand in currently demand-constrained areas of the world, and then the free market could probably take it from there.

But if after fiscal policy stepping back, automation and outsourcing gets back in vogue in a big way, hello government. If market participants can be cowed into thinking that they should get into risky investments because the government might eat away their returns via monetary easing, they could be cowed into thinking that the government will easily restart taxing anyone who starts hollowing out his company in the next upturn (and support those who don’t).

It’s probably either this—or if we can’t stop globalization in its tracks, we should already start thinking about bringing down national boundaries. Yup, no more nation-states. If capital will be free to go anywhere in the world to chase the highest returns, everybody else and everything else should be too. Otherwise, capital will simply go wherever it pleases, and damn it if turns a few more millions into permanent ‘slumdogs’. But since I don’t see anyone, other than John Lennon, imagining a world with no country, we better start thinking, for the moment, a world with less globalization (and more fiscal policy action to help this along).

I agree with your argument that monetary policy has more limitations than currently acknowledged.

But in terms of fiscal tools, I prefer import tariffs rather than direct subsidies. When faced with such a tariff on steel pipe, China spent $1 billion building a steel pipe plant in Texas, for one example.

Great idea, too, beezer. The aim is to use any tools necessary to promote job-creating businesses. There are businesses where a tariff would work better, such as those that have monopolistic characteristics, like a big steel plant. There are those in more competitive industries that might just migrate away to cheaper locations without subsidies. Whatever works, but monetary policy cannot be as nuanced as this.

John, I looked at the website, but I couldn't find a clear description of the mechanism whereby basing the money supply on the fixed price and finite quantity of gold facilitates a growing economy.How does a fixed money supply facilitate growing businesses and industries? Unless the idea is to destroy an equal amount elsewhere?

Tariffs are definitely to go, the Levy Institute did a study of Buffett's non-selective (that is, doesn't play favorites) import certificate plan. In the Levy report, they actually improved on it. Instead of Buffett's cap and trade tariff model, Tsy would use tariff revenue to cut payroll taxes. Using 2008 numbers, it would cut FICA taxes by a third. If I was running for office, I'd call it the "Fair Trade Tax Cut" (don't worry RC, I'd give our neighbors to the north a bye). :o)http://www.levyinstitute.org/publications/?docid=1077

.....China’s position on imbalances is also the same as the US position at Bretton Woods: the debtor should bear the burden of adjustment. In the present context, that means tighter US monetary and fiscal policy, as would be required under a classical gold standard (that is, the United States sends a dollar to China, China redeems it for gold, US gold stocks fall, policy tightens to draw gold back, imbalances fall). But........

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"Conventional approaches, unconventional conclusions" on the global finance and economic issues of the day. Rogue Econ has been a banker and financial consultant in several countries. Welcome to my blog.